Divest more assets, find a stronger buyer, and hire–at your expense–a monitor that will scrutinize every step of the divestiture process, or the antitrust agencies will challenge the transaction in court. That is increasingly the message that the leadership of the Department of Justice ("DOJ") and Federal Trade Commission ("FTC") are sending to merging parties seeking to clear the merger review process through a remedy.

On February 6, 2015, Bill Baer, the Assistant Attorney General of the DOJ’s Antitrust Division, affirmed that "taking a harder look at remedies" continues to be an ongoing DOJ focus.[1] Mr. Baer described DOJ’s willingness to ‘litigate the fix’, as the Department did in the American Airlines/US Airways and AB InBev/Grupo Modelo matters.[2] Mr. Baer also noted that DOJ "will continue to focus on obtaining effective relief where we find antitrust violations," and that he "applaud[s]" the FTC’s recent announcement of a sweeping new study to assess the efficacy of its recent remedies,[3] which, as described below, strongly portends more onerous FTC remedy demands going forward.

Collectively, the policies of the DOJ and FTC have produced clear trends:

Requirements that parties divest larger asset packages;

Demands for buyers with greater experience and resources;

Mandates that the merging parties complete divestitures more quickly;

Expanded use of "conduct" remedies that impose substantial regulatory-type requirements on parties; and

More frequent and expansive use of monitors.

These actions have several important implications. For merging parties, they can increase the cost, difficulty, and risk of addressing agency competition concerns, and may extend the time required to negotiate and implement divestiture packages. Greater FTC and DOJ remedy demands make it more essential than ever that parties carefully evaluate the viability of an acceptable divestiture or conduct remedy prior to executing a transaction they expect to generate antitrust scrutiny. The agencies’ stepped-up approach to merger remedies also provides opportunities for third parties to acquire increasingly larger and more attractive divestiture packages. Successfully purchasing divestiture assets can also require careful upfront planning, sometimes in collaboration with the merging parties. More attractive divestiture packages can generate competition among potential buyers to demonstrate to the parties that they can close quickly and convince the antitrust agencies that they can rapidly, if not immediately, replicate the pre-merger level of competition.

New FTC Merger Remedies Study

On January 9, 2015, the FTC announced a proposal to conduct a retrospective study of merger remedies to "assess the effectiveness of the Commission’s policies and practices regarding remedial orders where the Commission has permitted a merger but required a divestiture or other remedy."[4] The proposed study will examine 92 merger remedies that the FTC entered into from 2006 to 2012. For 53 of the remedies, the FTC plans to interview the buyers of the divested assets and participants in the industry, including the merged parties. For the 15 orders involving divestitures of supermarkets, drug stores, funeral homes, hospitals and other clinics, the FTC will send questionnaires to the buyers of divested assets. For the 24 orders involving divestitures in the pharmaceutical industry, the FTC intends to synthesize the information it has from compliance reports, monitors, and publicly available information. The announcement says that the FTC may subpoena documents and data if needed.[5]

If past is prologue, the study will result in the FTC further increasing the requirements that the parties need to satisfy for the Commission to accept a remedy proposal. The FTC conducted a similar study in 1999,[6] which produced recommendations that required merging parties to enhance remedy packages, including by divesting larger asset packages and requiring buyers to "submit an acceptable business plan" for the acquired assets. The FTC also affirmed policies that favored "divestitures of full, freestanding business units" and began requiring sellers to "facilitate the transfer of technology and knowledgeable staff to the buyer in addition to physical assets."[7] Although the Commission maintained that these changes did not "raise[] the bar for resolving merger concerns,"[8] this claim is difficult to reconcile with the practical implications of the study’s recommendations. Moreover, in announcing its latest study, the Commission stated it would "focus on more recent orders" because many recent orders "incorporated modifications based on the prior [1999 Study]."[9] This language signals that the Commission will evaluate whether the changes implemented after the 1999 Study have gone far enough to ensure that merger remedies are effective.

The possibility of additional remedy requirements is further enhanced by several high-profile failed merger remedies. In particular, in late 2014, the FTC closed the books on what was widely viewed as an unsuccessful attempt to remedy the alleged reductions in competition from the Hertz-Dollar Thrifty transaction. Two years earlier, in 2012, the FTC required Hertz to divest its low-cost brand, Advantage Rent a Car, to Franchise Services of North America, which previously operated other rental car outfits, including Rent-A-Wreck, to ameliorate the alleged anticompetitive effects resulting from Hertz’s acquisition of Dollar Thrifty.[10] Notably, the Advantage divestiture included many of the hallmark requirements that came out of the 1999 Study: there was a hold-separate requirement; a buyer was identified in the order (an "up-front buyer"); that buyer was an experienced rental car business operator;[11] Hertz was required to provide support and necessary assets to Advantage; and an independent monitor oversaw the divestiture.[12] Just a year later, however, Advantage filed for bankruptcy after Hertz terminated lease agreements that provided Advantage with its rental vehicles.[13] Advantage’s bankruptcy trustee has sold many of Advantage’s locations to other rental car companies already serving the same airport markets–including selling 10 of the original 72 divested locations back to Hertz and 12 others to Avis.[14] In each of these locations, the divestiture has failed to maintain the number of competitors that were in the market prior to the merger.

The FTC is accepting comments on the proposed new study until March 17, 2015, and the study itself will likely take more than a year to complete. But the Commission began implementing the recommendations contained in its 1999 Study even before it publicly released the study’s results,[15] and we expect the Commission’s remedy requirements to grow even before it announces formal policy changes stemming from the results of the new study.

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding the issues discussed above. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Antitrust and Trade Regulation Practice Group, or the authors of this alert: